On 2 September the Australian Taxation Office (ATO) released a new guide entitled “Assessing the Risk: allocation of profits within professional firms”. The document provides guidance for professionals such as Doctors, Accountants, Architects, Solicitors, Engineers or Dentists on the factors which will cause the ATO to classify them as ‘high risk’ and so likely targets for compliance action.
This follows from the Taxpayer Alert looking at professional partnerships which was released in November last year. It again warns that the ATO is currently reviewing professional partnerships and conducting examinations in relation to the current financial year.
The guidelines make clear that the ATO is concerned with genuine business structures carried on by partnerships, trustees or companies. It is noted that where a professional practice has at least as many non-principal practitioners as principal practitioners a genuine business structure is considered to exist. In a genuine business structure the ATO will be undertaking a close examination of the contractual relationships pertaining between individual professionals, the structure and its clients. As in last year’s Alert the ATO note that they will be considering whether contractual relationships are properly documented and legally effective and whether the professional practice is being conducted in accordance with those contractual relationships.
The guidelines explain what will cause the ATO to classify a professional practice as high or low risk.
The three key criteria they have provided are:
1. the professional receives assessable income from the firm in their own hands at least as high as the level of remuneration paid to the highest paid professional employees providing equivalent services to the firm, or if there are none, those in comparable firms or relevant industry benchmarks;
2. 50% or more of income to which the professional and his or her associated entities are collectively entitled in a relevant year is assessable in the hands of the individual professional; or
3. the professional and their associated entities have collectively an effective tax rate of 30% or higher on income received from the firm.
The examples provided by the ATO in the guidelines indicate that where a professional practitioner meets one of the criteria above they will, other things being equal, be considered low risk. Where they meet none of the criteria they will be considered high risk and there will be a much greater likelihood that ATO compliance action will be commenced.
The ATO also state that the lower the overall tax rate on the income generated from the professional practice the higher the likelihood of compliance action. Specifically, an arrangement with an effective tax rate of 15% will be considered higher risk than one with an effective tax rate of 25%. Even where the practitioner may have good solid business reasons for not meeting the ATO criteria the threat of compliance action, with the associated professional advice costs and disruption to the business, remains.
If you have any concerns about the structure and documentation for your professional practice and the means by which you and your associated entities receive income from that practice or if you just want to check your agreements cover all the issues that concern you and are up to date Julie Van der Velde can assist to ensure that you are aware of and able to plan for ATO compliance action based on their view of the ‘risk’ of your professional arrangements.
This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this article, or what it means for you, your business or your clients' businesses, please feel free to contact us.